Congratulations on your piece, "New Era For Taking Market's
Pulse," in Tuesday's Times. It doesn't have all the answers, but it
is the first serious effort in the popular press to get a handle on the debate
over stock valuations between the New Era group and the traditionalists. It
was especially smart to focus on Byron Wien as the traditionalist, as the Wall
Street universe is well aware of his problems in figuring out the market, and
Byron has been humbled enough to now tell you publicly that the world may have
passed him by. I've known and liked Byron for all the years of his
traditionalism, but it has long been obvious to me that his trusty old model
was obsolete. The same thing happened to Henry Kaufman in 1982, when he
continued forecasting doom during the early stages of the market boom in
stocks and bonds. A simple tradeoff between bond yields and equity values can
only work 50% of the time at best. When you are in an environment
characterized by a gradual reduction of risk in holding any dollar assets, the
relationship becomes even more unreliable. At least you got Byron to tell you
what goes on inside his head that has propelled him on the forecasting
roller-coaster of the past year. You can see he is betting on a 1000-point
drop in the Dow as soon as the Fed raises interest rates to slow the
economy, which I've been advising my clients will not happen. A year ago,
we forecast a DJIA over 6000 by year's end, simply based on our reading of the
political dynamics of the year. This year, on January 2, we forecast a DJIA of
at least 7400, on the assumption that the divided government would be
harmonious enough to pass a budget with a capital gains tax cut — which would
enable the economy to expand without an increase in interest rates. By the
way, on Jan. 2, when the average forecast of the dollar/yen rate among
blue-chip economists was 112 for the year, we said it would hit
130.

There is no model that enables a forecaster to be correct year in
and year out. The only truth is that change is perpetual, and if you want to
keep from being obsolete in your own life career, you have to tell yourself
every morning, as you get ready for the day, that you have never seen the
likes of what is coming. A stopped clock is right twice a day, which is how a
lot of people made their reputations on Wall Street, until they could not even
get it right that often. Did you ever read Chapter Seven of The Way the
World Works? In it, I describe in detail how the market crashed in 1929
because of the switching of Senate votes on the Smoot-Hawley Tariff Act. Would
the market crash now if tariffs were raised? That would depend on a lot of
other things, but I would not be surprised under certain circumstances if the
market found higher tariffs okay. I'm not arguing for them, understand, but
just making the point that you can't count on any single thing being
determinative in a world that changes every day. Dogma is death in financial
analysis.